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A SUMMARY OF WHAT IS TO BE COVERED:
LEGAL FORMS OF BUSINESS OWNERSHIP.
1.1: FORMS OF BUSINESS OWNERSHIP.
1.2: FORMALISING A BUSINESS.
1.3: COOPERATIVES IN UGANDA.
1.4: THE SAVINGS CREDIT AND COOPERATIVES SOCIETIES (SACCOS).
PRODUCTION IN BUSINESS.
2.1: HUMAN WANTS.
2.2: FACTORS OF PRODUCTION.
2.3: SPECIALISATION, DIVISION OF LABOUR AND DIVERSIFICATION IN PRODUCTION
2.4: RAW MATERIALS FOR PRODUCTION.
2.5: MACHINERY, EQUIPMENT AND TOOLS USED IN PRODUCTION.
MARKETING IN A SMALL AND MEDIUM BUSINESS ENTERPRISE (SME).
3.1: INTRODUCTION TO MARKETING.
3.2: MARKET RESEARCH.
3.3: CHANNELS OF DISTRIBUTION.
3.4: ADVERTISEMENT AND SALES PROMOTION.
3.5: CONSUMER PROTECTION.
MONEY AND FINANCIAL INSTITUTIONS.
4.1: MONEY.
4.2: THE CENTRAL BANK.
4.3: COMMERCIAL BANKS.
4.4: TYPES OF BANK ACCOUNTS.
4.5: MICRO FINANCE INSTITUTIONS.
4.6: ELECTRONIC BANKING.
TAXATION.
CHAPTER 1:
Introduction. In this chapter, we are going to study about different forms of business ownership from which an entrepreneur can choose the one that suits his or her enterprise. Businesses need to be formalised by registration with the government authorities in order to make their operations legal. Different legal forms of business ownership or business units have different implications on business start-up requirements and operations. However, there some small businesses that operate without formal registration but still provides the needs of the entrepreneur.
1.1: FORMS OF BUSINESS OWNERSHIP.
Business units are classified according to their form of ownership. A business can be owned by an individual or a group of people. At the start of any business an entrepreneur chooses his or her form of business ownership. This can either be;
A Sole proprietorship. A Partnership. A Limited company or a Cooperative society. Basing on different factors.
Sole proprietorship is a form of business organisation which is initiated, financed, managed and controlled by one person. The owner is called a sole proprietor. He or she raises capital, uses his or her own skills and intelligence in the management of the business affairs and is solely responsible for the results of the business. Sole proprietorships are usually micro and small sized businesses. Examples of Sole proprietorship forms of businesses include: kiosks, single shops, roadside traders, market traders and hawkers.
Characteristics of Sole proprietorship business.
Unlimited liability. There is unlimited liability whereby the entrepreneur takes personal liability for all the debts of the business since he / she enjoys all the profits arising from the business alone. Therefore, in the event of a loss or the business going bankrupt, the owner’s belongings can be sold to cater for the loss.
Single ownership. Sole proprietorship is a one man’s business. It is legally owned by one person but it may belong to a family who feel the ownership.
No separate entity from the business. People operating this form of business are not separate from it. This means that the entrepreneur is the business as a result of single ownership.
Undivided risk. Due to single ownership of business, the entrepreneur bears all the risks of the business alone.
Independent decision making. The single ownership of the business leads to control by one person who is responsible for planning and direction of the business. The ultimate authority lies in the hands of the entrepreneur.
Minimum government regulation. Unlike companies, there are no heavy government regulations that sole proprietorship businesses are subjected to. They are only subjected to general laws like licensing and legality of business, but not required to submit accounts, list of directors, etc. as it may be the case in other forms of business organizations.
Meaning of a partnership. A partnership refers to a kind of legal relationship between persons. Business partnership is a relationship formed by the agreement between two or more individuals to carry on a business with an aim of making profits. These persons pool resources (capital) to carry out a business as co-owners and share the profits arising from that business. A partner is one of the members that constitute a partnership.
Features of a partnership business.
The membership in a partnership business ranges between 2-20 persons. In case, of professionals like doctors, lawyers or accountants membership exceeds 20 but does not exceed 50 persons.
They are characterised by unlimited liability. Each partner in an ordinary partnership is personally liable for the firm’s debts and obligations up to the extent of selling his or her personal property to clear the business debts.
Each partner acts as an agent to the firm, with authority to enter into contracts of purchase or sale of goods on behalf of the business. That is to say, principal- agent relationship except for a limited partner. Any agreement entered into by a partner within the normal scope of business binds all the partners.
The business capital is got from the partners, who contribute capital for the firm. Hence, no subscription is allowed from the public for extra capital.
Shares in the partnership business are not freely transferable. They must be transferred with the consent and knowledge of all the members. The major decisions of the firm are made by the majority through joint consultations of business owners.
Types of business partnerships.
1. Permanent partnership. This is a partnership intended to continue indefinitely. That is to say, its end is not known at the time of the business formation. 2. Temporary partnership or joint venture. This is a partnership formed for a specified period of time for a specified purpose or project at the end of which the partnership is dissolved. 3. Limited partnership. This is a partnership where all members have limited liabilities except for the general partners. 4. Ordinary partnership. This is where all members have equal rights and responsibilities in a partnership. The liabilities of the members in this partnership are unlimited.
Advantages of partnership businesses. Partnership businesses have the following merits:
i) The possibility of joint consultations among the members results into wise decisions made by all the partners.
ii) There is a possibility of specialisation due to the big number of members. Hence, each partner can take on a given task in which he has the greatest ability or experience.
iii) The workload is spread amongst many members due to division of labour. Hence, partners are not over worked as compared to sole proprietorship business.
iv) The business can also have access to financial assistance from financial institutions because of the number of collateral securities that the members can raise.
v) There is a possibility of raising large sums capital due to the number of partners who contribute towards this business, unlike in sole proprietorship.
vi) The absence of one partner does not affect the operations of the firm’s activities like in the case of sole proprietorship businesses.
vii) The losses made by the business are shared by all the members. Hence, each partner feels a small impact.
Disadvantages of partnership businesses. Although partnerships have advantages as explained earlier, they face the following challenges:
i) The decision making process tend to be slow, due to joint consultations amongst all members to first agree upon any decisions to be taken about business matters.
ii) The progress of the firm may come to a standstill in case of death, insanity or bankruptcy of an active partner. This affects the operation of the business.
iii) A mistake made by one partner may affect the whole firm since the decision of one partner represents the decisions of other partners.
iv) Partnership is not recognised as a separate legal entity. Hence, it cannot sue or be sued in its own name. You cannot separate the partners from the partnership business.
v) Disagreements amongst members on important issues may affect the progress of the firm. Some partners may lack confidence in each other, leading to disagreements which hinders the success of the business.
Formation of partnerships. The partnership firms can be formed through an agreement between or among persons. A written agreement among business partners is known as a partnership deed.
This is agreement made by intending partners outline the terms and conditions under which the partnership will be conducted , for instance, It spells out the rights and obligations of the partners. It acts as a constitution for the partnership business. It acts as a reference in case of any misunderstandings between partners that may arise at a later future time. Acts as an evidence in courts of law when need arises to prove existence of the partnership.
Contents of a partnership deed.
a) The name and physical location of the partnership business. b) The name, address and occupation of each partner. c) The type of each partner in a partnership. d) The capital contributed by each partner. e) The ratio in which profits and losses are to be shared among partners. f) The rights and duties of each partner in a business. g) The duration of the partnership.
Private Limited Company. A private limited company is a business unit comprising of 2-50 members exclusive of the past and present employees who become members. These members put together their capital and other resources to start a business with an aim of making profits. Examples of private limited companies in Uganda include: Trinity metro industries Ltd, Nice House of plastics Ltd, Denovo bakery Ltd, Roofings Uganda Ltd.
Characteristics of private limited companies.
Private Limited Company have a membership between 2-50 members excluding employees, formed with an intention of making profits.
The shares are not freely transferable.
The liability of members is limited to their capital contributions.
Its not a legal requirement to publish the annual accounts of private limited companies to the public.
Private limited companies can only start its operations legally after registering with the registrar of companies and given a certificate of incorporation.
Public Limited company. A Public Limited company is a business unit consisting of a minimum of 7 members but with no upper limit on the number of members (shareholders). These members agree to come together and pool their resources to operate a business with an aim of making profits. Examples of Public limited companies in Uganda include: Uganda clays Ltd, Vision group of companies, Centenary bank Ltd and Uganda breweries Ltd.
Characteristics public limited companies.
They consist of a minimum of 7 members but with no upper limit on the number of members (shareholders).
The owners of the company are called shareholders.
Capital is raised through issue of shares to the public. I.e, they issue a prospectus to the public encouraging them to buy its shares.
The liability of the shareholders is limited to their capital contributions.
The shares are freely transferable unlike in the Private limited companies.
Public limited companies can start business only after registration and receiving a certificate of trading.
They a legal entity of its own quite separate from shareholders.
It is a legal requirement for them to publish their annual accounts to the public unlike private limited companies.
They are not affected by the death, bankruptcy or insanity of a shareholder.
Advantages of joint stock companies. Joint stock companies have the following merits or benefits or advantages :
i) They are in position to raise more capital due to the large numbers of shareholders involved. They can get financial assistance from banks since they can raise enough collateral securities in form of land, buildings or any other assets from its shareholders or the business assets.
ii) They are assured of a continued existence because death, bankruptcy or insanity of one member does not lead to the dissolution of the company.
iii) The freedom to transfer shares in a public limited company acts as an incentive to the shareholders who may wish to convert their shares into cash at any time they wish.
iv) The employees may be allowed and encouraged to buy shares in the company. This motivates them to work hard.
v) The losses are not heavily felt in joint stock companies since they are spread amongst many shareholders which is not the case of sole trade businesses.
vi) The shareholders enjoy limited liabilities. Hence, their personal belongings are protected by law and cannot be confiscated in case of a business debt.
Disadvantages of joint stock companies. Despite the advantages enjoyed by joint stock companies, they are faced by the following disadvantages:
i) The formation of a company is an expensive process which requires several formal procedures like preparation of the Memorandum of Association, Articles of Association among others.
ii) The shareholders have little control over the affairs of the company since control is in the hands of the board of directors.
iii) There is too much bureaucracy in these companies. Hence, a delay in decision making due to extensive consultations.
iv) Lack of confidentiality in Public Limited Companies due to the public declaration of their accounts annually.
v) There is lack of personal initiative in these companies compared to sole trade since profits are shared amongst many shareholders.
vi) There is limited flexibility in such companies, since it is not easy to change from one line of business to another because of the large size of the business and the complicated legal formalities before the company starts.
1.2: FORMALISING A BUSINESS. All entrepreneurs are required by law to register their businesses with government authorities in order to be able to operate successfully without any interference. In Uganda, the registration of businesses can be done physically or online at Uganda Registration Services Bureau (URSB). This helps the business to ensure a competitive brand against rival businesses.
A formal business refers to an enterprise registered by the registrar of companies and recognised by the law. Examples of such businesses include: Partnership businesses, Private Limited Companies, Public Limited Companies and Cooperatives.
Liability Clause. This clause states that the liability of the members shall be limited.
Declaration Clause. This states the desire of the promoters to form themselves into a public limited company. This declaration must be signed by a minimum of seven persons who must agree to take at least one share each. This clause sets out the names and addresses of the promoters and the number of shares each has agreed to take.
Articles of Association. This is also referred to as Table A of the company Act. It is a document that governs the internal organisation of the company. It lays down the rules and regulations about the organisation of the company. It acts as a constitution for the company. The Articles of Association includes the following :
The rights and powers of each type of shareholders. The qualifications, duties and powers of Directors. The method of calling and conducting general meetings. Rules governing election of directors and auditors. Auditing the books of accounts. The issue and transfer of shares. Among others.
Prospectus. This is a document prepared by a Public Limited Company to invite the public to subscribe for shares (buy shares of the company) in order to raise the required capital. This is usually printed in newspapers or may be sent directly to prospective people. After which a certificate of trading is issued to it, if the share capital has been raised. It must be signed by the registrar of companies to commence its business.
A certificate of incorporation. When the required documents are presented to the registrar of companies by the promoters of a private limited company and everything is found satisfactory a certificate of incorporation is issued. This gives a company a legal existence as an artificial legal person created by law. This document marks the birth of a company to commence its business activities. It must be signed by the registrar of companies.
Indicators of a formal business.
A formal business should have a certificate of incorporation for Private limited companies or trading certificate for Public limited companies. These documents show that the business is a legal entity and has a legal existence.
A formal business has a defined inter-relationships. Everybody in the business knows his or her authority and responsibilities. This clearly shows who reports to who.
Its based on specialisation and division of labour based on the different departments in the organisation. For example, marketing, production, IT and accounting departments.
The activities in a formal business, are based on rules and regulations which are clearly communicated by management in the business.
They have a clearly defined system, policies and procedures that govern the business operations, these are followed by management and employees.
Benefits of formalised Businesses.
i) The business is legally recognised in the society, since its registered by the registrar of companies. Therefore, it can perform its activities without any interference.
ii) They provide confidence to the customers as reputable businesses. This allows expansion of their market size as their management works hard to ensure a good public image.
iii) Formal businesses are well organised, since they have well laid down procedures, policies, structures and activities as one of the requirements on their registration, they can easily access loans from financial institutions in case they are challenged with limited capital, since they are legally recognised in the society.
iv) They are reliable and permanent and can easily get skilled labour and community support since they are officially recognised by the government.
v) Formal businesses have the opportunity to transact business with government for example, being given tenders to supply goods to government ministries and departments.
vi) They usually have a sound base for growth and development due to having a clear vision, mission, goals and objectives.
vii) Formal businesses comply with social security regulations and this helps their employees to save their income for future use. For example, National Social Security Fund (NSSF).
viii) Formal businesses ensure continuity, even if some shareholders die, withdraw or retire. They usually have a clearly laid down succession plan. Hence, allows continued existence.
Limitations for formalising a business.
i) The lengthy procedures or steps to be followed during registration and the documents to be submitted before registration makes it complicated. Hence, leading to some businesses operating without a formal registration.
ii) Strict laws and regulations that always put pressure on the business owners and management on registration of a business. For example, payment of taxes, filing the business performance among others.
iii) Ignorance about the registration process due to inadequate information about the steps and procedures to follow. This makes it hard for entrepreneurs to do it.
iv) High costs of registration charges and operation of a formal business, limit individuals from starting up a formal business.
Steps followed to register a Business. Below are the official steps that entrepreneurs wishing to register new firms especially the joint stock companies in Uganda have to go through:
- Searching for the business name. Search to verify that your proposed company name does not belong to anyone else. An online name search option is available on the URSB website.
- Reservation of the business name. Upon completion of the search for the business name in the registry database and found no similar name, the business name is then reserved.
- Obtain Certificate of Incorporation. Certificate of incorporation is obtained from Uganda Registration Service Bureau (URSB) after the submission of the requirements and company documents such as Memorandum of Association, Articles of Association, declaration of companies using forms A1, A2, A3, 7 and A9 plus the company resolution to the registrar of companies.
Paying any outstanding tax liabilities to URA and the local governments filling accounts and a company tax return with URA. The business must state that these are the final accounts due to the planned dissolution of the company. This enables URA to close down the company’s payroll scheme and de-registering that business for VAT.
The business has to confirm to registrar of companies that the company can, or has, paid any outstanding debts. The business closes the company bank accounts.
NOTE:
Informing of all interested parties and URA about the business’ decision to dissolve the company must be done within 7 days of application with URSB.
1.3 COOPERATIVES IN UGANDA.
Meaning of cooperatives. A cooperative society is an association of individuals (producers or consumers) who have agreed to come together, share responsibilities and carry out activities to achieve a common objective or goal. This is a voluntary association formed with a purpose of benefiting its members through working together collectively as a group than individuals.
History of cooperatives. In Uganda cooperative societies started as early as 1913 mainly to handle agricultural products such as cotton and coffee. Their activities have evolved over time. In the recent past, they acted as a very important tool especially for small scale savers and rural farmers who have been suffering from poverty. Unlike other forms of business organisations discussed earlier in this chapter, which have their main objective as making profits, cooperatives’ main objective is organising and rendering services to its members.
Features or characteristics of cooperatives.
A cooperative society enjoys a separate and independent status distinct from that of its members.
The capital is raised from members through buying shares. However, the shares are not freely transferred as in Limited Companies.
(^) The owners of the cooperative society are the consumers, producers or savers. A cooperative society should have a minimum of 10 members to be registered for its operation.
Cooperative societies are subjected to government control and in Uganda, they are registered under the cooperative societies Act 1993.
Part of profits or surplus made by a cooperative society in a particular financial year is distributed among members in form of dividends. These are distributed on the basis of services rendered by members towards the success of that cooperative society. Another part which is not retained if agreed in the cooperatives’ policy can be paid out to its members as interest on their share capital.
A cooperative society is a voluntary association which can be joined by any person and leave it anytime at his or her free will.
The liability of the members towards the debts and obligations of the society is limited to their capital contribution.
They are controlled by an elected committee of management who are also members of the society and each member is entitled to only one vote irrespective of the number of his or her shares.
Principles or policies of Cooperative Societies. In order for any organisation to be referred to as a cooperative , it must have some basic principles or policies governing it. These include the following :
Open and voluntary membership. Entry is free for any interested member who can comply with the rules and regulations of the cooperatives. Therefore, membership should not be limited by social, political, tribal, racial or religious differences. Any person can join and leave at any time.
Democratic control or administration. The affairs of the cooperative societies are conducted in a democratic way and collectively. Management of a cooperative society is elected by all members basing on the principle of ‘one man one vote’ irrespective of the shares held by an individual in the cooperative society. However, these should be adults (over 18 years) with contractual capacity.
Dividends or repayment. This principle states that the profits or surplus made by the society during a year should be distributed among the members in form of dividends or repayment at the end of the trading period. However, the dividends are distributed basing on each member’s contribution to the society. For example, a producers’ cooperative will pay dividends according to how much one has sold to the cooperative. If its a consumers’ cooperative, it will pay dividends basing on how much an individual has bought from that society.
Limited interest on share capital. The principle states that no interest should be paid on share capital contributed by members. However, if the society’s constitution provides for it, then the given rate of interest should be fixed and known to all members. This enables the society to pay better dividends to its members.
Co-operation with other cooperatives. Cooperatives must cooperate with other cooperatives at local, national and international levels, since they have a lot to share in common and learn from each other. For example they can come together to share experiences and challenges in their cooperative societies.
Capital contribution. The capital to the society is supposed to be contributed by the members through buying shares. A minimum share capital is set which each member must contribute to become a member of that cooperative society. However, a member may hold several shares up to the upper limit specified by a cooperative society.
Neutrality. Cooperative societies are not supposed to discriminate amongst its members basing on tribe, religion, politics, economic differences among others. This helps to promote unity among members of any cooperative society.
Education to members. Cooperative societies are expected to provide education to their members on successful business techniques and other cooperative affairs.
Types of Cooperative Societies. There are different types of cooperatives formed by members. These include :
- Consumers’ cooperative societies. These are associations set up by a group of buyers or consumers. They buy goods or commodities from producers or suppliers in bulk (large) quantities at a reasonable price and sell them to members at a minimum economic price. Examples of such consumer cooperatives in Uganda include: Lugazi sugar factory consumers’ cooperative society.
- Producers’ cooperative society. This is an association formed by small scale producers to collectively produce, process, transport and market their products. This is done at the best prices possible with the aim of fighting competition and retain profits for the members. Examples of producer’s cooperatives in Uganda include: Bugisu cooperative union, Busoga growers cooperative society to mention a few.
Starts operation.
Explanation :
A minimum of 10 people aged 18 years and above may come together and form a cooperative society for a common objective. They record their personal information and their financial contribution to the cooperative society. Members who have come together draft the by-laws, in this case members draft rules and regulations for the purpose of governing their cooperative society.
A joint application to the registrar is made with accompanying documents such as, particulars relating to membership, share capital, a draft of by-laws and the cooperatives’ objectives. They are all submitted to the registrar of cooperatives for approval. If the registrar finds them worthwhile, he or she goes ahead to register that cooperative society.
The commissioner for cooperatives issues a certificate of registration to make the cooperative society’s operation legal. Once the certificate has been obtained the cooperative society starts operating.
